As a plaintiff attorney, you have the unique ability to defer some or all of your contingency fees through a number of tax-advantaged investments. By deferring the recognition of income, you can reduce your taxable income in the current year and defer it to a future year when your overall income may be lower. You may also choose to spread it out over a number of years to create a predictable income and potentially avoid the tax bracket jump that can accompany large spikes in income. 

You can choose to defer your fees regardless of whether or not your client chooses to structure.

Keep in mind, though, that electing to defer your fees must be part of the settlement agreement, and the defendant or insurer must enter into a Qualified or Non-Qualified Assignment, as well as pay the deferral fees directly to the assignment company that is linked up to the investment or annuity provider.

Structured Attorney Fees

The terms of the structured fee agreement, including the amount and frequency of payments, are agreed upon between the attorney, the defendant, and the insurance company within the settlement documents.

Payments under a structured attorney fee agreement may be received on a periodic basis, such as monthly or annually, or in a lump sum. The timing and amount of payments are determined by the terms of the agreement and may be subject to various restrictions, such as minimum and maximum payment amounts, or payment duration. You can elect to begin receiving payments immediately or beginning at a later date.

The income received under a structured attorney fee agreement is reported on your tax return as ordinary income in the year it is received. The net result is pre-tax growth of your deferred fee.

Tax Guidance for Structured Attorney Fees

When fees are transferred directly from the defendant or insurer to an assignment company, rather than to the attorney directly, those fees are not in constructive receipt. This is because, the funds are not considered to be readily available to the attorney and are instead subject to the terms and conditions of the release and assignment agreement. Therefore, the fees do not count yet as taxable income, and taxes can be legally deferred.

Non-Fixed Annuity Options for Attorneys

Non-Fixed Annuity options for attorneys looking to defer their fees include variable annuities, index-linked annuities, and market-based portfolios. There may be minimum investment requirements for these types of fee deferrals, which can vary by product. There are usually costs involved such as annual fees.

The advantages of non-fixed annuity options include the potential for higher returns and flexible investment options, allowing the attorney to potentially choose from a variety of underlying investment options, such as mutual funds or stock market indices. However, these options also come with higher risk and there is no guaranteed rate of return. It's important to carefully consider your investment goals, risk tolerance, and financial situation before choosing a non-fixed annuity option for fee deferral. We can discuss your options.